Is anyone else making a pension contribution before the budget?

[MotherOfDragonflies]

Am I worrying over nothing? I’m self employed and generally wait until the end of the tax year to put money into my pension since I can then see what I can afford to put in but reading about labours planned pension raid and the chances that they will remove the 25 percent tax free sum for new contributions and also reduce tax relief on contributions has me worried. My pension isn’t amazing and I’d been planning on increasing contributions.

is it worth putting in a lump sum or could I be tying up money for no real tax advantage

Agree.
It's ludicrous really to disincentivize pension saving when pensions are such a significant investor in UK plc. At a time when our economy needs investment and growth.

As you say, if I'm not somehow incentivized to save into a pension, then why on earth would I tie up my money for decades to come? I'd just save into other investment vehicles (S&S ISAs) and (at least in my experience) the investments are less likely to include the same weighting towards UK companies (particularly if UK economy isn't showing growth).

TLDR - pensions need to be considered at a long-term, broader level in terms of overall potential affect on the UK economy. Not simply a 'quick fix' to gain more short-term tax receipts into the public purse. Getting it wrong = getting it really wrong.

I was at a meeting a few years back when Steve Webb (previously Lib Dem MP & pensions minister in the Coalition Gov (and now a Sir) ) was guest speaker. This was around the time the Annual Allowance had just been reduced to £40k and he was musing on the fact that the ISA allowance had been steadily increasing over the years and the Pension Allowance reducing. As a previous insider to the workings of The Treasury it was discussed that maybe this was the intendee direction of travel. More tax is lost on tax relief than it is lost on taxing non-ISA interest. And the vast proportion of tax relief given on pensions is for the 40% taxpayers.

My view is that on Budget day tax relief will be equalised.....and that is it. At what rate I dont know (20%....maybe 25%) but there will be no changes to the 25% TFC.

Money Week are reporting this week that the cost of the tax relief is £50 billion with a third of that in respect of basic rate taxpayers. Axeing higher rate relief completely would save 14 billion and equalising at 30% would save 3 billion.

If they remove this immediately the only way of recouping this is going to be via tax returns. Good luck HMRC dealing with millions more of those next year

TLDR - pensions need to be considered at a long-term, broader level in terms of overall potential affect on the UK economy. Not simply a 'quick fix' to gain more short-term tax receipts into the public purse. Getting it wrong = getting it really wrong.

This with bells on.
The problem is that Labour don't dream of staying in power for longer than two terms.

They'll squeeze everything now hoping that people will forget by 2029, will blame everything on Tory and that it's not enough time to fix the damages, then loosen policy a little bit in 2028 before next election.

The real issue will unfold when pension savings will be reduced giving huge headache to new government and ability of pension funds to invest is decimated as well.

Also - when people have access to their savings/investments instead of locking it in pension there is a huge risk of these funds being spend

This is old news and much debated before.

I expect Labour to implement it at some stage. The impact will be significant increase of part-timing and early retirements amongst higher earners so the total tax take will reduce dramatically, net effect will be negative. Combined with UK's overall low productivity and shortage of skills.

I know - I made the same point upthread. I was responding to the previous comment discussing available analysis

I wouldn't bank on that entire "saving" suddenly being directed into tax receipts at all.

It's already been discussed multiple time on this thread alone (and countless others) that those earning £100k-£125k would simply reduce hours as it would make absolutely no financial sense to work in that tax bracket given you're worse off if you have kids in childcare, than when earning £99,999.

Reducing hours = no tax take on that earning chunk at all (be it at source, or at later withdrawal of pension. Currently, people in the £100-125k band mostly pay it into pension to avoid the crippling taxation and reduce their net adjusted income. yes, the government don't get tax on that immediately, but they do get to tax it on the withdrawal of the pension later on.

Don't get me wrong, I'm not saying everyone will reduce hours. But it's naive to assume a lot of people won't be considering this (as said before, I certainly will reduce hours as I'd be genuinely worse off if I didn't in terms of £ in my pocket each month).

Thanks for sharing, this was an interesting read - I suppose the reason DB is being carved out is that an option for the relief is topping up the contributions once made in the scheme and the contributions aren't ringfenced for an individual in a DB scheme in the same way as in a DC scheme.

Indeed I used to work for a large company where the closed DB scheme was non contributory by the employee - lucky for them!

I'm also disappointed as you state that there is no recognition of the reason why people contribute extra into their pension at the £100k level (childcare benefits, 60% effective rate etc) and if this isn't addressed at the same time this will lead to unintended behavioural changes.

Let's hope the government reads further analysis beyond this report.

I always find it quite striking when people talk about tax relief being 'given' to the tax payers, as if there was no difference between tax relief (ie not taking some of your earnings) and a benefit (handing you some money).

This report is no different in how they frame that. Saying that it's unfair for higher earners to be 'given' more tax relief than lower earners... ignoring the fact that the reason they get more tax relief is because they're paying a higher rate of tax in the first place.

I think the viewpoint depends on whether you believe the starting position is that your earnings belong to you - and you're giving some to the government. Or whether you believe the starting position is that your earnings all belong to the government - and they're letting you keep some.

But you are highlighting a key practical difference.

If the government decide to withdraw a particular benefit, they know clearly how much money that will save them. Because it's the government's money, which they're handing out.

If the government decide to withdraw a tax relief, they have no idea how much money it will save them. The taxpayer can choose not to earn that money (if it's no longer worthwhile for them) and hence not give it to the government. Because it's the taxpayer's effort, not the government's.

I actually think that's why Labour ignore the impact of behavioural change due to their policies, and don't bother trying to analyse it.

Because they see all our money as theirs. So they don't recognise that actually tax relief is fundamentally different to handing out a benefit.

"They might want to collect it via tax self assessments. Agree it will be chaotic but this government can't surprise me."

It would also cost a fortune and overwhelm HMRC if everyone in a the higher rate tax band suddenly had to do a tax return?

Precisely. Why would anybody take the risk, and relinquish control of their money for decades with Governments free to raid it again later, or apply even higher tax rates to it upon withdrawal?

The issue with employer contributions is easily fixed: employers can just add the option for employees to take it as a cash benefit instead (effectively add it to salary), be taxed on it now, then do with it what they wish and thus avoid the double taxation that would be applied if tax relief at the point of contribution is reduced AND remove the risk of subsequent Governments trying to devise more ways to appropriate the money they've saved at a later date.

All serious reports into pensions have emphasised the importance of a stable platform of regulation because this is decades-long planning and people have to be able to trust that the goalposts won't be moved.

The suggestion in that linked study that because it's complicated to apply to DB schemes they should be exempted, even though they are already much better value and already receive far more favourable tax treatment is beyond crazy. So penalise those who already have pensions with less generous tax treatment by making theirs even more unfavourable and let those with generous tax treatment have even more advantage?

Quite obviously no sane Government would propose to do any of the above because it would harm productivity, reduce pension saving, increase welfare dependence, lower economic growth and business investment, increase skills shortages, undermine the basic principle of the entire pension system in the UK and therefore decimate pension saving, reduce overall tax revenue, reduce the workforce by encouraging earlier retirements, impose very large unnecessary costs on companies and HMRC and break key election pledges that this Government has made.

Let's hope there is a better plan for economic growth than that! Labour said they were focused on growth and everyone in the business community gave them the benefit of the doubt so to do something that would so obviously achieve the complete opposite on every possible measure at their first budget would likely damage their reputation and the goodwill for them as a new Government beyond repair and mean they're unlikely to get a second term. It would be pretty silly to hammer nails into your coffin when you've only just started when there are so many other measures they could take that would actually improve things in the UK.

I agree absolutely with the PPs as well who have raised how absurd it is to claim higher/ additional rate tax payers are somehow being "given" money by the state because it doesn't take yet more money from them because all pension contributions are exempt from tax. Why should some people be taxed on them and some not? Of course it's "worth more" to people who pay higher rates of tax in the first place, because they're already subsidising everyone else! To propose to raid their retirement savings and double tax them so that their savings can be transferred to other people who didn't earn that money and put in their pension pots instead is ridiculous. Especially when it is this same group of people already funding public services and state pensions for everyone else.

This idea that somehow someone not confiscating yet more money you've earned to give it to others is someone giving something to you is egregious.

The economic studies show how people in this bracket are already cutting their hours due to the tax cliff edges. A chancellor with any intelligence who wants economic growth would remove the cliff-edges at all levels, and would see the positive effect from this in a matter of months, as economic studies have shown. Rational reform of the tax system if they want to lower welfare payments and increase revenue would be to scrap the withdrawal of the personal allowance, scrap the withdrawal of childcare funding/ child benefit, and drastically lower the universal credit taper rate to around 50% of its current level. Economic participation and tax revenues would increase immensely, growth would be boosted significantly, skills shortages reduced and tax revenue rise.

Even the Guardian has reported on the economic studies on this:

www.theguardian.com/business/2023/feb/13/full-time-part-time-work-no-longer-pays-uk-economy

Hunt ignored the economists who told him this repeatedly. Let's hope Reeves - as an economist - has more sense and does what will actually work rather than trying to score virtuous points by penalising again the people who have been carrying everyone else for over a decade thereby making things worse for everyone.

Has anyone actually told Labour that the simplest way to raise more tax would be to remove the cliff edges (like the £100-125k 60% tax bracket) or at least turn them into a gentle, grassy slope?

It would actually solve a lot of the problems that report raises. And not piss off the people who pay 30% of the UK's income tax, destroy productivity or destroy UK company investment.

Sometimes class war isn't actually the most effective solution.

Agree!

To add to that also - NOT abruptly take away all childcare subsidies or tax-free amounts at the exact same salary too.

Appreciate the salary I'm on (never ever thought I would be) but I admit it pains me that I'm raided for tax left, right and centre and not even able to benefit from the schemes my tax helps pay for. If we want women in work and succeeding in high paying roles then childcare support should be universal - if not, its viewed as just another 'tax' when its abruptly taken away (not even a taper down)

Sadly, a number of economists have told both the previous Government and this one the blatantly obvious fact that this is what they need to do, with robust studies to demonstrate this, yet nothing has been done to rectify it. And instead we hear plans like this pensions nonsense mooted which quite clearly would exacerbate the situation and make tax revenue drop even further. Madness. Let's hope somebody in Government has a brain.

Appreciate the salary I'm on (never ever thought I would be) but I admit it pains me that I'm raided for tax left, right and centre and not even able to benefit from the schemes my tax helps pay for. If we want women in work and succeeding in high paying roles then childcare support should be universal - if not, its viewed as just another 'tax' when its abruptly taken away (not even a taper down)

Yes. And it would also help if they would stop taxing single parents - 90% of whom are women - far more than couples with the same household income.

If they did that it would be calamitous. At 20% tax relief it would mean all 40/45/60% tax payers would be paying 20/25/40% tax on contributions and another 20% on withdrawals in most cases. Under such rules why would anyone on higher rates of tax pay a penny into a pension. I currently pay 60k pa and would drop to nil under those rules.

There are lots of references on this thread and other threads to utilising ISAs if the rules change on pensions.

What are people's views on potential changes to ISAs (if they suddenly become more popular will the government change these e.g. reduce the annual allowance).

Just to add I've found this post really interesting so thanks to everyone who has shared their thoughts.

The simple answer is that the people these measures are targeting are not the super wealthy who pay tax rates similar to those on minimum wage in the UK, they are very experienced/ highly qualified professionals on PAYE who generally have high-stress roles and work very long hours, often in skills shortage areas both in the UK and internationally.

They also pay some of the very highest tax rates in the entire world for this earnings level already and have been the cohort hammered in the UK to fund everything and everyone for the last couple of decades because they were perceived as an easy target being mostly PAYE earners. At some point it becomes not worth bothering so the already increasing levels of such people cutting their hours significantly, moving abroad or retiring early will increase exponentially and overall tax revenue will reduce very significantly and all of the UK's economic problems will get even worse as a result. We have a very narrow tax base already compared to most similar economies and are extremely reliant already on this exact demographic to keep things afloat.

The social contract depends upon universality and people getting something back for their efforts, so while they're happy to pay for themselves and others, they're not going to bother at all if they are denied access to a lot of the services they are funding for everyone else and faced with real marginal tax rates of 85% or even over 100% in some cases, and then have people trying to appropriate their retirement savings/ general savings as well.

What would be the point in bothering to work? This is happening already as I stated, so moves like that to yet again try to milk the same people who are already being treated as cash cows and have been paying Scandinavian levels of tax for developing country levels of services because the rest of society isn't paying anywhere near its fair share is not sustainable and nor should anybody expect people to tolerate it.

@MidnightLibraryCard er thanks for your reply, I think. Did you mean to reply to me? I asked what people might think about ISAs re potential changes to pensions, selfishly because I'm thinking about utilising my ISA allowance more but worried it might also change in the future.

You seem to have directed a whole post at me about PAYE etc and I'm not sure why. I'm one of the people with high stress, long hours and well paid role so I get it.

I meant that it would be even more crazy if they decimate ISAs and pensions, because of the effects it will have on the wider economy, productivity and tax revenues.

It would be a crazy thing to do, just like messing with pensions. You'd hope no Government would be so irresponsible and do either because it would have the opposite effect to creating growth which they (correctly) stated is the only way to improve things in the UK. But whether they meant that and will actually take measures to improve growth, or do the opposite and instead trash pension savings and/ or ISAs which would have the opposite effect, who knows?

Either would be a stupid idea, but our politicians don't seem to make particularly intelligent decisions unfortunately.

I don't think they can realistically tax money that's already in an ISA. If they are stupid they may discourage savings and investment by lowering future annual limits on ISAs but money in ISAs has already been taxed so is protected. Hence why if they do this stupid taxing of pensions contributions people will just be taxed now and use ISAs (and work less) rather than be double taxed on their pensions and at the mercy of future changes to tax rates as well.